cross boarder pipeline, caspian. raballand and esen caspian sea[1]

AEJ 5:133146 (2007) DOI 10.1007/s10308-006-0086-y

ORIGIN AL PAPER

Gal Raballand . Ferhat Esen

Economics and politics of cross-border oil pipelinesthe case of the Caspian basinPublished online: 24 October 2006 Springer-Verlag 2006

Abstract The construction of cross-border pipelines requires large upfront investment and, because of transit through third countries, is subject to increased risk. We demonstrate that the decision to build cross-border pipelines in landlocked regions is influenced more by economics than by politics. Governments use transportation constraints to discriminate among foreign oil companies and to promote low-efficiency routes for political purposes. This paper describes strategies used by importers and oil majors to address this limitation, using the Caspian basin as a reference. Based on data obtained from oil professionals operating in the region, and professional journals, we highlight that, on average, transportation costs in the Caspian basin are up to six times higher than in the other oil-producing regions of the world. Oil transportation exists at the crossroads of geography, history and politics. In times when the concept of energy security is in vogue, oil importers and oil majors tend to explore and produce oil from the more remote regions of the world (either in landlocked countries or offshore in deepwater). In the case of production in the former, transportation by pipeline is the cheapest mode. Pipeline economics has four main dimensions: economies of scale; the long life of projects; State involvement, and pipelines vulnerability to market failure. Politics is never far from the oil business. According to most political scientists, the tendency of oil majors to try to influence governmental decisions regarding pipeline construction goes up as States increasingly strive to become involved inThis paper does not reflect opinions and views of EBRD. The authors would wish to thank Yelena Kalyuzhnova, Richard Pomfret, Martin Raiser and Dana Ward. This article was written prior to Mr. Esen having joined the EBRD and contains no data or information which Mr. Esen may have been privy to during the course of his employment with the EBRD. G. Raballand (*) Observatoire des Etudes Post-Sovitiques, 701-18th St. NW, Washington, DC 20433, USA E-mail: [email protected] F. Esen EBRD, Baku, Azerbaijan

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this type of project.1 As Shaffer (2005) points out, politics designs and makes possible the building of cross-border oil pipelines. During the past decade, the literature concerning the Caspian basin oil boom has focused on geopolitical issues. The concept of the new Great Game has become more and more popular, although this assertion neglects economic realities and oil companies strategies. However, economics is the main factor explaining the success or failure of the creation of oil pipeline routes, according to many economists. The financial backing of commercial and development banks is necessary for any major oil pipeline project. If risks seem to be excessive, the chance to attract investors is slim. Neither political pressure on oil companies or on local governments has a great chance of success if projects are considered as too risky. Ultimately, projects must stand on their own commercial merit and the economics of a project will dictate its success (Nanay 2003). To highlight these opposing views, we examine the case of the Caspian basin. In the first section, we demonstrate the link between landlockedness, politics and economics of cross-border oil pipelines. The second section shows how local governments use transportation constraints to discriminate against foreign oil companies in the Caspian basin. It describes how national companies such as Transneft and Kazmunaigaz use transport constraints as a means of bargaining. Finally, we analyse strategies used by western governments and oil majors in the face of transport constraints. Being landlocked2, politics and economics of cross-border oil pipelines Cross-border pipelines face three main obstacles: 1. multiple parties, with different interests, are involved in a pipeline project; 2. there is no overarching legal jurisdiction to police and regulate activities and contracts; and 3. the projects create profit and rent, which must be shared among various parties (UNDP/World Bank 2003). Consequently, one easily understands why in politically unstable regions, crossborder pipelines may be at the core of bilateral disputes. As Ebel (2001) points out: a pipeline can follow peace, but peace can not follow a pipeline. Although, some observers have suggested that building pipelines could eventually contribute to conflict resolution, notably in the Caucasus; however this is wishful thinking. Cross-border pipelines have peculiar economic and legal specificities because they: require large upfront investment, demand high fixed costs, are subject to economies of scale,1 See Yerasimos (1996), Roy (1997), Terzian (1999) and Ceragioli and Martellini (2003) with this approach. 2 See Raballand (2003) for a move in-depth empirical investigation of the impact of being landlocked on trade.

Economics and politics of cross-border oil pipelinesthe case of the Caspian basin

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are built in a long-term perspective, and depend on contracts governed by different legal systems. Oil transportation from landlocked nations involves, by definition, transit through at least one other country. Passage through a third country makes pipeline operations and the legal environment even more complex. It complicates negotiations and ultimately contributes to added transportation costs. In addition, oil companies can only build pipelines when intergovernmental agreements are in place. Oil majors use several strategies to lessen uncertainty and to protect their investments. They strive to develop alternative routes for exports, to lessen financial loss in the case of government created problems, for example, the reduction of export quotas on the cheapest routes. In addition, to protect large upfront investments in the face of inherent political risks, oil majors must ensure that they have full State support. Based on these inherent risks, oil-importing governments put pressure on production and transit nations to sign intergovernmental agreements allowing transit. In addition, they seek to improve mechanisms for regional cooperation and contract enforcement. A dependency relationship is thus established between oil-producing and oilimporting countries and oil majors. Oil-producing nations need to establish sustainable relationships with export markets, and require oil majors to invest in exploration and production whereas oil-importing countries need energy to sustain their economies. As a result of this dependency, oil companies diversify export outlets and ultimately pay additional transport costs as a result of their increased exposure to potential transit problems. However, long-term disruptions of oil exports are rare because they are neither in the interest of the oil companies nor of governments, which risk losing an important source of revenue. Leveraging transportation to influence markets: the Caspian case Central Asias landlockedness increases regional transportation costs and is of major consequence for oil companies. ENI CEO, and Gian Maria Gros-Pietro, have declared that maritime transport is the cheapest mode of transport, the main question [concerning the Caspian basin] is consequently to determine which port is economically the most attractive.3 This phenomenon is particularly acute in the Caspian basin4 because the distance to the nearest ports is high. For example it is 1,500 km from Kashagan (expected to become the main oilfield in Kazakhstan) to Novorossiysk, a major Russian oil export outlet in the Black Sea. Transportation costs from the Caspian basin are far more expensive than in other oil-producing regions of the world and more complex to tackle. As mentioned above, on average, transportation costs are up to six times higher here than in other oil-producing regions of the world.in Oil and Gas Kazakhstan. the exception of Chad, the countries around the Caspian Sea are the only landlocked countries with substantial oil reserves in their subsoil. In the case of Chad it has been demonstrated that transport costs involving the ChadCameroon pipeline, account for a high share of overall production costs. Oil transportation costs in the Caspian Basin are even higher, approximately 50% greater than those in Chad.4 With 3 Quoted

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The extraction of natural resources is critical for the economic expansion of the region. Consequently, sustained growth will mainly depend on the success of Caspian oil and natural gas development (EIA Caspian Report 2005 p. 23). As a signal of their independence, and in order to improve their negotiation power with the oil majors, Central Asian oil and gas producing states (Kazakhstan, Azerbaijan, Uzbekistan and Turkmenistan) have established national petroleum distribution companies.5 These companies use transport quotas and prices to influence markets. As Mathieu and Shiells (2002) state: national governments took advantage of monopolistic positions to extract rents by limiting pipeline access. Transneft and Kazmunaigaz are good examples to illustrate these policies in the Caspian basin. The case of Transneft Transneft6,7 has maintained its monopoly on oil transportation. It owns and operates export pipelines that serve Former Soviet Union (FSU) ports. The company operates 48,000 km of gas pipelines, 336 oil pumping stations, and 861 reservoirs for the storage and three oil terminals: Novorossiysk, Tuapse and Primorsk (Interfax Russia & CIS Business and Investment Weekly). Russian quotas and export pricing policiesSetting quotas and export pricing is a two-step process. First, the Russian Oil Ministry draws up quarterly export schedules. Secondly, once these are approved, Transneft decides when and where oil is pumped in order to fill the export plans. It then signs bilateral agreements with oil companies. This type of agreement is usually updated every year. Transneft tariffs are determined by the FEK (Federal Energy Commission). Theoretically, in order to limit discrimination, Transnefts pricing policy applies the same fixed rates to all exporters. In reality, Transnefts tariffs fluctuate among oil companies using the same pipelines and Transneft sets its own tariff policy. Special long-term rates may be negotiated, which determine agreed shipping volumes over several years. Tariffs are sometimes reduced on pipeline routes to bring them at par with rail tariffs, when they are lower than pipeline tariffs.

Transneft prefers diverting Caspian oil through expensive and marginal export outlets to exploit under utilized capacity. Kazakhstan producers suffer from discrimination to use Transnefts network. In the past, Transneft has gone so far as to reject Kazakhstans requests to transport oil through cheap Russian outlets.8 Kazakh producers claim that they pay double transit rates, in comparison with Russian counterparts. Kazakhstan has appealed for transit tariffs on par with those5 Respectively KazMunayGas (2002), SOCAR (1992), UzbekNefteGas (1999), TurkmenNefteGas (1997). 6 The Russian Federal Property Agency owns 100% of voting shares (75% of charter capital). Transnefts cargo turnover increased by 3% in 2005, oil deliveries increased by 1.1% and net profit grew by 27%. Oil exports to countries outside the CIS went up by 16.9 million tonnes to 213.2 million tonnes. Consolidated revenues totaled 191.3 billion rubles in 2005, according to preliminary figures. Net profit reached 55.7 billion. 7 Transneft is a state-owned company: the Russian Government holds 75% and Interros and Sputnik 25%. 8 Russias reluctance to allow Kazakhstan access to favorable destinations is mainly due to lobbying from Russian oil companies. Their main justification is that reducing or ending Kazakh exports would help Russian producers to boost exports, given the capacity constraints and the increasing expected production.


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paid by Russian exporters. They have also requested the right to sign transit agreements on a monthly basis, in order to improve flexibility and reactivity in negotiating quotas and rates. Contrary to what Transneft has regularly stated, the Russian company has export capacity in excess to export Russian oil to Europe (UNDP/World Bank 2003: 6667). The Russian authorities have limited and controlled the access to export capacity of producers operating in Kazakhstan and some in Russia. Russias bilateral political relations with neighbouring countries affect Transnefts quotas and tariff policy.9 In recent years, Russian authorities have tried to block exports through Baltic States, and promote exports via Gdansk. Attractive prices are established via Kaliningrad and Primorsk ports whereas transit fees are especially high for oil transiting through ports of the Baltic States. Transneft considers the Polish port, Gdansk, as an official export route for Russian crude. This announcement followed a brutal political decision to cut oil flows to Ventspils (Latvia). In the Caucasus, Baku-Novorossiysk has one of the highest pricing structures in the region, despite being one the shortest routes. Since construction of the competing CPC pipeline began and completed, Kazakhstans transit quota through the Transneft system has increased by a factor of four. The case of Kazakhstan Kazakh authorities have been using two ways to bargain with oil companies: transport quotas and fiscal policy.10 Transportation issue is particularly relevant for Kazakhstan because oil exports have increased rapidly in the last five years, mainly as a consequence of exportation through the TengizNovorossiysk pipeline (see Fig. 1 for exports trends). Transportation has gradually become at the core of the national oil and gas company, Kazmunaigaz. Indeed, in the mid 1990, different companies take care of oil transport, exploration and production. In the early 2000, merging process in oil and gas industry in Kazakhstan started. In 2001, companies in charge of oil and gas transportation11 merged; Transneftegaz (TNG) was born. One year later, transportation and exploration/production companies merged;12 Kazmunaigaz was born, a new vertically integrated company. As far as transport quotas are concerned, PetroKazakhstans13 case illustrates the importance of transportation for companies operating in Kazakhstan. Transport issues are at the core of PetroKazakhstans business. Indeed, unlike the oil majors9 Transneft strives to reconcile difficult economic and political considerations. In a mid to longterm perspective, due to the expected decline of West Siberian and Ural fields production, Caspian oil flows will be needed for the development of new Russian routes. The future economic viability of terminals such as Primorsk or Vitino are dependent on additional Caspian oil flows. It is therefore in Transnefts commercial interest to accommodate requests from oil companies operating in the Caspian. However, political considerations may pull it in another direction. 10 For details about fiscal regime and the recent introduction of economic rent tax for oil export, Ernst and Young (2004). 11 KazTransOil and KazTransGaz respectively. 12 TNG and Kazakhoil respectively. 13 The company changed its name, from Hurricane, in 2003. It is the largest independent oil company operating in Kazakhstan. Chinese National Petroleum Company (CNPC) took over PetroKazakhstan in 2005.

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70 60Oil Exports 54 48.3 37.6 56

63.9

50 40 30 20 10 0

9.8 13.5 14.6

18.3

22.1 23.2

28.4

34.7 35.1

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

Fig. 1 Kazakhstan export trends. Source: French economic mission in Kazakhstan and Kazakh ministry of energy. Figures in millions of tons per year

in the region, PetroKazakhstans operations are in the centre of Kazakhstan,14 rather than around the Caspian Sea. This means it operates in a double landlocked environment: in a landlocked region in a landlocked country. When PetroKazakhstan began production, it had to export mainly by rail because the Kumkol region, where it operates, was not connected to the main pipeline system. Consequently, on average, PetroKazakhstan bore transportation costs close to USD 12 per barrel.15 Kazakhstan is increasingly developing the means to exert control over foreign investors in the oil sector. Oil transport is a critical element in this strategy. Kazakh authorities use transport capacity and export quotas as a means of pressure against oil companies. Petrokazakhstan pays for the geographical location of oilfields where it operates. PetroKazakhstans strategy was divided into three successive steps. First, when Caspian Pipeline Consortium (CPC) started to function in late 2001, PetroKazakhstan tried to export through it, as the low cost alternative. Use of the CPC would have reduced transportation costs by one third.16 However a dispute emerged between Kazmunaigaz and PetroKazakhstan and an agreement was not reached. Refusal by Kazakh authorities may have been for two main reasons: The desire to develop exports through Makhatchkala-Novorossiysk, Their wish for a pipeline between Kenkiyak and Kumkol17 because the export quota for KenkiyakOrsk (granted by the Russians) had been significantly increased.18 The second step of PetroKazakshans strategy was to develop exports through the AtyrauSamara pipeline because it was the second cheapest route for thecompany approximately produces 100,000 bpd in Kumkol region. following figures regarding transport costs are extracted from different press articles and professional reviews dedicated to oil issues as well as several interviews of professionals in Kazakhstan. 16 Transportation costs would have been equal to USD 8 per barrel. 17 The cost of this project was estimated to 350 millions USD, whereas PetroKazakhstan wanted to build a shorter pipe to Dzhusaly rail terminal estimated to 60 millions de dollars. 18 7 million tons in 2002.15 The 14 The


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company. Here too PetroKazakhstans plans conflicted with those of the Kazakh authorities. Indeed, in 2002, the Russians had increased Kazakhstans export quotas through the AktauMakhatchkalaNovorossiysk pipeline to 3.5 million tons. However, this route has been one of the most expensive in the region. Subsequently the Government of Kazakhstan established incentives for PetroKazakhstan to export via this route, including preferential prices (by rail) between Kumkol and Aktau.19 For PetroKazakhstan, this solution was still too costly. They finally agreed on a third solution, backed by the Kazakhs: to build a new pipeline between Kenkiyak and Kumkol. PetroKazakhstan was consequently unable to build a shorter pipe to the Dzhusaly rail terminal, the cost of which was estimated at USD 60 million, compared to USD 350 million USD for the government-proposed Kenkiyak-Kumkol pipeline. However, to pressure PetroKazakhstan into accepting this solution, the Kazakh authorities reduced export quotas for PetroKazakhstan in May 2002.20 Consequently, the company had to cut its production by 2.5 million barrels in one month, and suffer the resulting losses. Following this tension between the Kazakhs and the Canadians, in November 2002, PetroKazakhstan finally announced it agreed on the transport option proposed by Kazmunaigaz: construction of a 700 km pipeline between Kenkiyak, Aralsk and Kumkol.21 Compared with other major oil basins around the world, oil companies face major transport and export risks in the Caspian. Consequently, the major oil companies have elaborated a risk management plan based on export routes. Strategies to mitigate transportation risks Caspian energy investment is perceived as for the larger multinationals due to the high investment risk. Companies strive to mitigate risk in the Caspian basin by developing new export routes Governments, by developing intergovernmental agreements and by promoting what have been called pipe dreams. Companies strategies: diversification of export routes Currently, Caspian crude oil is exported in all directions: to Western Europe, the US, Eastern Europe (Romania and Bulgaria), as well as to Russian refineries (such as Samara and Orsk) and also to Iran and to China (Xinjiang). When the Central Asian states became independent, the only existing infrastructure consisted of the Transneft pipeline network. In order to break the

19 Kazakh

authorities granted to PetroKazakhstan with 1.2 million of tons through MakhatchakalaNovorossiysk. 20 The Energy Minister had originally announced 442,000 tons, however, only 265,000 were granted. 21 Transportation costs are USD 9.5 per barrel through this route. This pipeline is still being built.

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Transneft monopoly, and to reduce transport costs, foreign oil companies developed a two-pronged strategy: developing alternatives modes of transportation, building new pipelines capacities, In the early nineties, oil majors such as Chevron were constrained by Transneft through its quotas policy. In a first step, TengizChevroil (TCO) responded by exporting oil via the Russian rail network22 as well as barges on the Caspian Sea. In the late 1990, Chevron exported approximately half of its export output from Tengiz by rail. It also developed a second option through the BakuBatumi route from the port of Aktau (Kazakhstan).23 However, oil transportation by rail has remained much more expensive than by pipeline. Moreover, the rail system in the former Soviet Union has faced bottlenecks, especially as regards to rolling stock. In a second step, although reluctant to sign throughput and deficiency agreements24 considered too risky, the oil majors have finally banded together to jointly build a new pipeline between Tengiz and Novorossiysk, the CPC. In December 1996, the founding members of the CPC (Caspian Pipeline Consortium)25 signed a restructuring agreement with Chevron and a group of other producers.26 In November 2000, pipeline building was declared as completed. In October 2001, first oil tanker was loaded in the new terminal on the Black Sea, Yuzhnaya Ozerevka (near Novorossiysk). Today, despite the fact that more than 50% of Kazakhstans oil exports go through Russian territory, oil from the Caspian basin is exported through more than fifteen different routes that reach the Black, Baltic and Arctic Seas and to Europe via pipeline or rail (see Fig. 2). The diversification of transport modes and routes has resulted in a large discrepancy in tariffs among export routes27 (see Table 1). Analysing data from Table 1, three points can be highlighted: 1. Land transportation costs are higher than those by tanker from coastal oilproducing regions. In the case of Kazakh oil, the minimum transportation costs are USD 8 per ton (for Druzhba pipeline) and all other transport prices are above USD 18, which is significantly higher than transport by tanker from the22 For example, in 1998 and 1999 TCO leased approximately 5,000 and 6,000 railcars, respectively, from various Russian and Kazakhstani companies to export via Ukrainian ports. 23 Oil was loaded onto barges with a capacity of 6,000 tonnes in Aktau port and transported to Baku, where oil was filled onto railcars to Batumi port. 24 T&D agreements are guarantees by producers to ship a specified level of throughput over a specific pipeline. Usually, if producers do not ship the specified volume, they must take equivalent payments to the carrier according to the terms of the agreement. 25 Russian Federation, Kazakhstan and Sultanate of Oman. 26 CPC shareholders are: Russian Federation (24%), Kazakhstan (19%), Sultanate of Oman (7%), Chevron (15%), LukArco (12.5%), Rosneft-Shell (7.5%), Mobil (7.5%), Agip (2%), British Gas (2%), Kazakhstan Pipeline Ventures (1.75%), Oryx (1.75%). 27 From the existing major oilfield in the region (Tengiz in North Kazakhstan) to Novorossiysk, oil professionals estimate transportation costs between USD 3.5 and 4.5 per barrel. An additional USD 2 has to be added for delivery from Novorossiysk to Rotterdam. Total transportation cost averages approximately USD 6 per barrel.


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Fig. 2 Caspian export outlets in 2003. Source: oil literature reviews, notably Gavrichev (2003), Chernysov (2002), Lee (2003)

Persian Gulf to Western Europe (especially when compared to the relatively short distance between Western Kazakhstan and the Black Sea). 2. Rail is the most expensive mode of land transportation compared to pipeline transportation. With the exception of transportation on the Russian rail network (which is competitive due to artificially low prices offered to attract oil traffic), rail is significantly more expensive in the Caucasus and in Kazakhstan. Tariffs for AktauBakuBatumi route are 50% higher than the main pipeline alternatives. 3. For a company operating in West Kazakhstan, the main options (Druzhba Central Europe, CPC, Primorsk) range between USD 18 and 26 per ton. This makes the Russian pipeline network the most profitable route for a major based in West Kazakhstan. However, prices fluctuate rapidly for numerous reasons.28 Due to unpredictable price, tariffs and quotas, oil flows also change rapidly (see Table 2). Authorities may try to influence export routes oil majors use. Governments strategies: pipe dreams29 During the past decade, oil diplomacy in the Caspian basin has been intense. Several foreign governments use political and economic leverage to influence pipeline building in the Caspian region. Despite active oil diplomacy, it has rarely taken precedence over economic fundamentals. Indeed, dozens of pipe dreams have remained on paper despite strong pressure from one or several governments.

28 Transportation

tariffs depend on many factors, such as customers, type of contracts, technical conditions, supply/demand trends and seasons of the year. 29 See Stauffer (2000) for the concept of pipe dreams.

142 Table 1 Export tariffs along different routes in 2003 Export route Western Kazakhstan-Europe (Druzhba) Western Kazakhstan-Kaliningrad Western Kazakhstan-Odessa Western Kazakhstan-Primorsk Baku-Supsa Western Kazakhstan-Odessa Baku-Novorossiysk Western Kazakhstan (Druzhba)-Gdansk Atyrau-Novorossiysk (CPC) Atyrau-Samara-Novorossiysk Kumkol-Chinese border Aktau-Baku-Batumi Western Kazakhstan-Novorossiysk Turkmenistan-Novorossiysk (different routes) Tengiz-Feodosiya Aktobe-Talinn


Tariffs 8.23 18 18.7 19.56 21.4 23 24.67 25 26.19 30 30 33 38 43 67 77

Source: Interviews with oil professionals, oil literature reviews notably Gavrichev (2003), Chernysov (2002), Lee (2003). Figures in USD per ton.

EastWest Energy Corridor Oil diplomacy entered a new phase in the early 1990 when US State Department overtly supported a policy of Eurasian Energy Corridors. US authorities have been supporting export routes, which bypass Russia and Iran and have been striving toTable 2 Evolution of the export volumes (20002003) in tons 2000 2001 2002 Western Kazakhstan-Europe (Druzhba) Western Kazakhstan-Kaliningrad Western Kazakhstan-Odessa Western Kazakhstan-Primorsk Baku-Supsa Western Kazakhstan-Odessa Baku-Novorossiysk Western Kazakhstan (Druzhba)-Gdansk Atyrau-Novorossiysk (CPC) Atyrau-Samara-Novorossiysk Kumkol-Chinese border Aktau-Baku-Batumi Western Kazakhstan-Novorossiysk Turkmenistan-Novorossiysk (various routes) Tengiz-Feodosiya 1171 7 8195 0 4900 2341 561 0 0 1707 584 3640 594 191 3976 2145 323 8082 0 5870 2296 2306 0 934 3430 1414 4600 655 5 3388 3493 592 6857 1003 6205 1020 2752 0 10998 3248 2023 5470 408 481 363 2003 163 292 7137 1483 6293 12 2716 3463 12983 3300 3500 5537 136 77 489 Change 20002003 86% NA 13% NA 28% 99% 384% NA 1290% 93% 500% 52% 77% 60% 88%

Source: Interviews with oil professionals, oil literature reviews notably Gavrichev (2003), Chernysov (2002), Lee (2003).


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Fig. 3 Main caspian oil exports outlets and routes

establish an EastWest Energy corridor. Before the BTC project was officially approved, dozens of articles were published on the possible future and alternative pipeline routes. However, within this framework, the US Government was especially supportive of the BTC (BakuTbilissiCeyhan)30 route and the TCP (Trans-Caspian Gas Pipeline). Oil diplomacy started to begin with the signing ceremony of the Deal of the Century in Azerbaijan in 1994. The Deal of the Century31 was considered as one of the main sources of oil that made this project possible. Turkey was also a strong supporter of the BTC. For the Turks, this route had the immense advantage of allowing resumption of oil flows from the Ceyhan terminal. These had virtually stopped after the first Gulf War, despite major investments in the terminal in the late 1980.

30 The

USD 3.6 billion pipeline will have a capacity of 1 million barrel per day and is expected to become operational in 2005. 31 It was signed between Azerbaijan and foreign oil companies for the operation of AzeriChirag Gneshli fields.

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For nearly ten years, the BTC project crystallized supporters and opponents of US oil diplomacy in the region. Opponents of the project denounced the lack of viability and economic soundness of the route. Criticism mainly came from Russia, Iran and Armenia.32 Political views colored the debate on both sides. Opponents of the project tried to convey the idea that ACG volumes would not be sufficient to make the BTC viable. However, foreign oil companies rapidly estimated that AzeriChiragGneshli (ACG) oilfields would have recoverable reserves of around 5 billion barrels. Consequently, a new pipeline would be needed when the ACG oilfields reached their production plateau beginning in 2008. Despite reservations on the part of some major companies (such as ChevronTexaco or Total in the late 1990), the BTC33 company was established in August 2002 and the final phase of the project started in 2003. That is why Shaffer (2005) explains that the success of politics over economics of pipelines. Kashagans outlets The concept of pipe dreams regained importance after the official announcement of the Kashagan discovery in 2000. Most oil professionals operating in the region expect a minimum export capacity of 3 million barrels per day (bpd)34 from the basin by 20082010. By this time, CPC and BTC should be able to export more than 2.2 million bpd. Consequently, one additional major pipeline will probably be needed for volumes produced in the Kazakh sector of the Caspian Sea, due to the limited capacity of existing pipelines (see Fig. 3 for details about the existing outlets). The next step will be the connection of Kazakhstans reserves to the BTC. Indeed, Kazakhstan will be more and more constrained by export quotas in the Transneft network. Consequently, US authorities have strived to interest foreign companies operating in Kazakhstan in the BTC. They have even started to refer to the pipeline as ABTC (AktauBTC) instead of BTC. Although 150,000 barrels per day could be exported by barges from the Kazah port of Aktau to Baku, the US government exerted pressure for a commitment of over 400,000 barrels per day.35 According to Julia Nanay, this latter volume would be costly for the consortium however. Consequently, Kazakhstan has signed a memorandum with the other countries of the BTC agreement (Azerbaijan, Georgia and Turkey) and a protocol with the BTC consortium that provides the framework for Kazakh participation in future negotiations. And, in June 2006, Kazakhstan signed an agreement to export 3 million tons per years and pledged to export 25 million tons in the future (500,000 barrels per day). For Kazakhstan, this route represents one of the Bosphorus by-pass options.32 Costs to build a pipeline along the BakuTabriz (Iran)Ceyhan route would indeed have been less costly than the BTC. 33 Consortium participations are the following: BP 34.76%, SOCAR 25%, Unocal 8.9%, Statoil 8.71%, TPAO (Turkey) 6.87%, ENI/Agip 5%, Total 5%, Itochu 3.4%, Amerada Hess 2.36%. 34 This figure could increase if significant discoveries are made in the Russian or Kazakh sectors in the following years. Exploration hasnt yet been completed here, and there is hope for discovery in both of these areas. 35 Azerbaijan and Kazakhstan started to prepare the development of the ABTC route. On the Azeri side, the port capacity of Sangachal (Azerpetrol terminal) near Baku was upgraded and will have a capacity of 10 metric tons (MT) per year (200,000 bpd). On the Kazakh side, loading capacity at the Aktau port will be upgraded and the construction of a new terminal at Kuryk Bay will enhance capacity to 5 MT/year.


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In addition, three options are generally discussed for a possible alternative pipeline: the TAP,36 the Chinese or Iranian (KTI)37 routes. The economic analysis of the most discussed projects is described below: During the US-led campaign against the Taliban in 2001, the idea for project TAP (Turkmenistan-Afghanistan-Pakistan) was revived. Nevertheless, several points make this route rather hypothetical: Pakistans financial capacity is meagre and this pipeline could cost approximately $2.5 billion, Turkmenistan oil production will remain limited in the future, which means TAP can only be a gas pipeline, which is of less interest for oil majors. Today, Pakistan oil imports from Central Asia only reach 300,000 barrels per day or 15 millions per annum. In these conditions, the prospect for an oil pipeline from Turkmenistan to Pakistan remains vague. As a result, the present development of economic relations between Iran and Pakistan on those issues may become more legitimate. The Chinese route was proposed several years ago. Indeed, in 1997, the Chinese National Pipeline Corporation acquired 60% of Aqtobemunaigaz, which started to develop oil production in West Kazakhstan. It was then proposed to build a pipeline between West Kazakhstan and East China through Xinjiang. However this pipeline would have stretched thousands of kilometres and cost several billion dollars. Economic imperatives of the oil business dictate a limitation of overland transport. Consequently, the full Chinese option has been slow to develop. In late 1999, a feasibility study concluded that oil volumes from Aqtbemunaigaz were insufficient to justify this huge investment. However, the Chinese appetite for oil is so high and the policy to diversify oil supplies so critical, that this investment is becoming more attractive, especially in light of high international oil prices. In December 2005, a first step was reached. Indeed, Kazakh and Chinese authorities inaugurated a 988-km pipeline between Atasu (central Kazakhstan) and Alashankou (KazakhChinese border). Despite its initial limited capacity (10 million ton per year),38 this pipeline should link Kumkol oilfields and Alashankou. Aqtbe region oilfields owned by CNPC should be eventually linked to China by pipeline when the KenkiyakKumkol pipeline will be achieved. The third major option remains the KTI (KazakhstanTurkmenistanIran)39 pipeline. On the occasion of Iranian Presidents visit in Almaty, both Mohammed Khatami and Nursultan Nazarbaev described the Iranian option as the most cost36 Turkmenistan-Afghanistan-Pakistan. 37 Kazakhstan-Turkmenistan-Iran. 38 Capacity 39 Swap

should be upgraded to 20 million ton per year in 2011. agreements remain a marginal mode of exports. No more than 20,000 bpd is exported via Iran from Kazakhstan despite a 100,000 bpd 10-year agreement signed in May 1996, cf. Lee (2003). 40 Transnefts proposed route would be a little bit different. In July 2001, the Russian company announced that Russian oil could be exported along the route OmskPavlodarChimkent ChardzhouNeka and Tehran. 41 This law allows the US to apply sanctions against any company investing more than $20 million/year in the energy production of either nation.

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effective for exporting Kazakhstan oil. Transneft backs this option,40 but the main backer of the KTI has been Total. Indeed, the French company has been working on a feasibility study of this route that shows that it would probably be the least costly. The main concern with this option is the American policy vis--vis the Iranian regime. In August 2001, President Bush signed a 5-year extension of the IranLibya sanctions act.41 Consequently, this route could only be developed with a Damocles sword upon it, which seriously limits its economic prospects. In conclusion, building cross-border pipelines in landlocked regions depends not only on politics but also on economics. Economic realities and oil companies strategies should not be neglected to understand the politics of pipelines. Pipelines feasibility may be encapsulated in finding a consensus among oil companies, oil-exporting and transit countries to share the benefits of the oil rent. Obviously, this task is not easy. That is why, governance, respect of a balance of interests or credible threats for breach of contract appear to be critical for contract enforcement in this regard (UNDP/World Bank 2003). Researchers and practitioners studying the potential of the Caspian basin should consequently put at the top of their agenda these issues of governance and institutional incentives, which substantially influence the economics of pipeline. ReferencesCeragioli P, Martellini M (2003) The geopolitics of pipelines. Asia Times (29 May) Chernysov S (2002) Oil transport boom, Russ Pet Invest (NovDec) Ebel R (2001) The American policy in central asia, unchanged but flexible, Presentation to a conference organized by Dfense Nationale Review (April) Ernst, Young (2004) Kazakhstan Oil and Gas Tax Guide Gavrichev S (2003) Persian hugs: oil exporters eye Iranian export routes. The Russian Energy (2 March) Interfax Russia & CIS Business and Investment Weekly, 4, 17 (111) Lee J (2003) FSU Oil exports through Iran set to increase. Oil Gas J 101 (14 April) Mathieu P, Shiells C (2002) The commonwealth of independent states troubled energy sectors. Finance Dev 39:3, (September) Nanay J (2003) Statement for the committee on Senate foreign relations subcommittee on international economic policy. Export and Trade Promotion, 30 April (mimeo), Washington Raballand G (2003) Determinants of the negative impact of being landlocked on trade: an empirical investigation through the Central Asian case. Comp Econ Stud pp 520536, (December) Roy O (1997) Le Noeud Caspien. Polit Int 76:221233, Summer Shaffer B (2005) From pipedream to pipeline: a Caspian success story. Curr Hist 684:343346, (October) Stauffer TR (2000) Caspian fantasy: the economics of political pipelines. Brown J World Aff 7 (2):6378, Summer/Fall Terzian P (1999) Presentation during the Colloquium on Central Asia hosted by the French Senate UNDP/World Bank (2003) Cross-border oil and gas pipelines: problems and prospects, Mimeo Yerasimos S (1996) Des Histoires de Tuyaux et de Ptrole. Hrodote 81:106125, (AprilJune)

cross boarder pipeline, caspian. raballand and esen caspian sea[1]

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